<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____ to _____
Commission File Number 0-5550
TCI COMMUNICATIONS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-0588868
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
All of the Registrant's common stock is owned by Tele-Communications,
Inc. The number of shares outstanding of the Registrant's common stock as of
October 31, 1998, was:
Class A common stock -811,655 shares; and
Class B common stock - 94,447 shares.
<PAGE> 2
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
Assets amounts in millions
<S> <C> <C>
Cash and cash equivalents $ -- 1
Restricted cash (note 3) 358 35
Trade and other receivables, net 456 319
Investment in Cablevision Systems Corporation ("CSC"), accounted for under the
equity method (note 4)
574 --
Investments in other affiliates, accounted for under the equity method, and
related receivables (note 5)
588 231
Property and equipment, at cost:
Land 56 70
Distribution systems 9,388 9,547
Support equipment and buildings 1,357 1,351
------- -------
10,801 10,968
Less accumulated depreciation 4,492 4,444
------- -------
6,309 6,524
------- -------
Franchise costs 15,029 17,154
Less accumulated amortization 2,572 2,711
------- -------
12,457 14,443
------- -------
Other assets, net of accumulated amortization 352 305
------- -------
$21,094 21,858
======= =======
</TABLE>
(continued)
I-1
<PAGE> 3
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
Liabilities and Common Stockholder's Deficit amounts in millions
<S> <C> <C>
Accounts payable $ 147 131
Accrued interest 154 248
Accrued programming expense 258 242
Other accrued expenses 677 651
Debt (note 7) 12,244 13,528
Deferred income taxes 5,355 5,215
Other liabilities (note 6) 284 125
-------- --------
Total liabilities 19,119 20,140
-------- --------
Minority interests in equity of consolidated
subsidiaries 668 787
Redeemable preferred stock 232 232
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts ("Trust
Preferred Securities") holding solely
subordinated debt securities of the Company
(note 8) 1,500 1,500
Common stockholder's deficit:
Class A common stock, $1 par value. Authorized
910,553 shares; issued and outstanding
811,655 shares 1 1
Class B common stock, $1 par value.
Authorized, issued and outstanding 94,447 -- --
Additional paid-in capital 1,800 1,857
Accumulated other comprehensive earnings, net
of taxes (note 1) 44 4
Accumulated deficit (956) (957)
-------- --------
889 905
Investment in Tele-Communications, Inc. ("TCI"),
at cost (1,144) (1,143)
Due from related parties (note 9) (170) (563)
-------- --------
Total common stockholder's deficit (425) (801)
-------- --------
Commitments and contingencies (notes
2, 6, 10 and 11)
$ 21,094 21,858
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE> 4
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- -------------------
1998 1997 1998 1997
--------------------- -------------------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue (note 9) $ 1,442 1,562 4,429 4,612
Operating costs and expenses:
Operating:
Unaffiliated 473 533 1,460 1,590
Related party (note 9) 60 54 178 136
Selling, general and administrative (note 9) 299 302 908 855
Year 2000 costs (note 11) 3 -- 3 --
Stock compensation (note 10) 13 35 149 43
Depreciation and amortization 355 325 1,079 1,019
------- ------- ------- -------
1,203 1,249 3,777 3,643
------- ------- ------- -------
Operating income 239 313 652 969
Other income (expense):
Interest expense (236) (257) (728) (803)
Interest income 4 5 6 12
Intercompany interest, net (note 9) 1 2 5 11
Share of losses of CSC (note 4) (43) -- (89) --
Share of losses of other affiliates, net (note 5) (32) (25) (3) (47)
Loss on early extinguishment of debt (note 7) (6) -- (44) (11)
Minority interests in earnings of consolidated subsidiaries,
net (note 8) (45) (46) (134) (127)
Gain (loss) on disposition of assets, net (notes 4 and 6) 300 (35) 493 5
Other, net (4) (5) (12) (4)
------- ------- ------- -------
(61) (361) (506) (964)
------- ------- ------- -------
Earnings (loss) before income taxes 178 (48) 146 5
Income tax benefit (expense) (104) 10 (145) (17)
------- ------- ------- -------
Net earnings (loss) 74 (38) 1 (12)
Dividend requirements on preferred stocks (2) (2) (7) (7)
------- ------- ------- -------
Net earnings (loss) attributable to common stockholder
$ 72 (40) (6) (19)
======= ======= ======= =======
Comprehensive earnings (loss) (note 1) $ 116 (35) 41 (3)
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 5
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statement of Common Stockholder's Deficit
Nine months ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Additional comprehensive
Common stock paid-in earnings,
Class A Class B capital net of taxes
------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 1 -- 1,857 4
Net earnings -- -- -- --
Accreted dividends on redeemable
preferred stock -- -- (7) --
Change in unrealized holding gains on
available-for-sale securities, net of
taxes -- -- -- 40
Transfer of net liabilities from related
party (note 9) -- -- (50) --
Transfer of net assets from TCI (note 9)
TCI Group Stock (as defined in note 1)
received in connection with settlement
of litigation -- -- -- --
Change in due from related parties -- -- -- --
------ -- ------ ------
Balance at September 30, 1998 $ 1 -- 1,800 44
====== == ====== ======
</TABLE>
<TABLE>
<CAPTION>
Total
Investment Due common
Accumulated in from related stockholder's
deficit TCI parties deficit
----------- ---------- ------------ ------------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1998 (957) (1,143) (563) (801)
Net earnings 1 -- -- 1
Accreted dividends on redeemable
preferred stock -- -- -- (7)
Change in unrealized holding gains
on available-for-sale securities, net
of taxes -- -- -- 40
Transfer of net liabilities from related
party (note 9) -- -- -- (50)
Transfer of net assets from TCI
(note 9) -- -- 130 130
TCI Group Stock (as defined in
note 1) received in connection with
settlement of litigation -- (1) -- (1)
Change in due from related parties -- -- 263 263
------ ------ ------ ------
Balance at September 30, 1998 (956) (1,144) (170) (425)
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 6
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1998 1997
---- ----
amounts in millions
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1 (12)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,079 1,019
Stock compensation 149 43
Payments of obligation relating to stock compensation (56) (4)
Share of losses of CSC 89 --
Share of losses of other affiliates, net 3 47
Loss on early extinguishment of debt 44 11
Minority interests in earnings of consolidated
subsidiaries, net 134 127
Gain on disposition of assets (493) (5)
Intercompany tax allocation (8) 125
Deferred income tax expense (benefit) 126 (108)
Payments of restructuring charges (4) (21)
Other noncash charges 3 3
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables (142) (1)
Change in accruals and payables (57) 22
------- -------
Net cash provided by operating activities 868 1,246
------- -------
Cash flows from investing activities:
Cash paid for acquisitions (122) (160)
Capital expended for property and equipment (994) (324)
Investments in and loans to affiliates (174) (31)
Collections of loans to affiliates 1,509 16
Proceeds from disposition of assets 355 269
Change in restricted cash (323) 39
Cash received in exchanges 45 18
Other investing activities 2 (50)
------- -------
Net cash provided by (used in) investing
activities 298 (223)
------- -------
Cash flows from financing activities:
Borrowings of debt 2,583 2,928
Repayments of debt (3,725) (3,686)
Payment of redeemable preferred stock dividends (7) (7)
Payment of dividends on subsidiary preferred stock and
Trust Preferred Securities (134) (124)
Prepayment penalties (39) (7)
Net change in due from related parties 155 (617)
Proceeds from issuance of Trust Preferred Securities -- 490
------- -------
Net cash used in financing activities (1,167) (1,023)
------- -------
Net change in cash and cash equivalents (1) --
Cash and cash equivalents at beginning of period 1 --
------- -------
Cash and cash equivalents at end of period $ -- --
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 7
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1998
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of TCI Communications, Inc. ("TCIC" or the "Company") and those of all
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. TCI owns 100% of
the common stock of TCIC.
TCIC, through its subsidiaries and affiliates, is principally engaged
in the construction, acquisition, ownership and operation of cable
television systems. TCIC operates its cable television systems
throughout the United States.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations
for any interim period are not necessarily indicative of results for
the full year. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto contained in TCIC's Annual Report on Form 10-K for the year
ended December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
TCI common stock, par value $1.00 per share, is comprised of six
series: Tele-Communications, Inc. Series A TCI Group Common Stock ("TCI
Group Series A Stock"), Tele-Communications, Inc. Series B TCI Group
Common Stock ("TCI Group Series B Stock" and, together with the TCI
Group Series A Stock, "TCI Group Stock"), Tele-Communications, Inc.
Series A Liberty Media Group Common Stock ("Liberty Group Series A
Stock"), Tele-Communications, Inc. Series B Liberty Media Group Common
Stock ("Liberty Group Series B Stock" and, together with the Liberty
Group Series A Stock, the "Liberty Group Stock"), Tele-Communications,
Inc. Series A TCI Ventures Group Common Stock ("TCI Ventures Group
Series A Stock") and Tele-Communications, Inc. Series B TCI Ventures
Group Common Stock ("TCI Ventures Group Series B Stock" and, together
with the TCI Ventures Group Series A Stock, the "TCI Ventures Group
Stock").
(continued)
I-6
<PAGE> 8
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
The Liberty Group Stock is intended to reflect the separate performance
of the "Liberty Media Group," which is comprised of TCI's assets which
produce and distribute programming services. The TCI Ventures Group
Stock is intended to reflect the separate performance of the "TCI
Ventures Group," which is comprised of TCI's principal international
assets and businesses and substantially all of TCI's non-cable and
non-programming assets. The TCI Group Stock is intended to reflect the
separate performance of TCI and its subsidiaries and assets not
attributed to Liberty Media Group or TCI Ventures Group. Such
subsidiaries and assets are referred to as "TCI Group" and are
comprised primarily of TCI's domestic cable and communications
business. TCIC is attributed to TCI Group.
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). The Company has reclassified its
prior period consolidated balance sheet and consolidated statements of
operations to conform to the requirements of SFAS 130. SFAS 130
requires that all items which are components of comprehensive earnings
or losses be reported in a financial statement in the period in which
they are recognized. The Company has included unrealized holding gains
and losses on available-for-sale securities in other comprehensive
earnings that are recorded directly in stockholder's deficit. Pursuant
to SFAS 130, this item is reflected, net of related tax effects, as a
component of comprehensive earnings in the Company's consolidated
statements of operations, and is included in accumulated other
comprehensive earnings in the Company's consolidated balance sheets and
statement of common stockholder's deficit.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, ("SFAS 133"), which is effective
for all fiscal years beginning after June 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative
instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their
fair values. Under SFAS 133, changes in the fair values of derivative
instruments are recognized immediately in earnings unless those
instruments qualify as hedges of the (1) fair values of existing
assets, liabilities, or firm commitments, (2) variability of cash flows
of forecasted transactions, or (3) foreign currency exposures of net
investments in foreign operations. Although management of the Company
has not completed its assessment of the impact of SFAS 133 on its
consolidated results of operations and financial position, management
estimates that the impact of SFAS 133 will not be material.
Certain prior period amounts have been reclassified for comparability
with the 1998 presentation.
(continued)
I-7
<PAGE> 9
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(2) Proposed Merger
TCI and AT&T Corp. ("AT&T") have agreed to a merger (the "Merger")
pursuant to, and subject to the terms and conditions set forth in, the
Agreement and Plan of Restructuring and Merger, dated as of June 23,
1998 (the "Merger Agreement"), among TCI, AT&T and an indirect
wholly-owned subsidiary of AT&T. In the Merger, TCI will become a
wholly-owned subsidiary of AT&T and (i) each share of TCI Group Series
A Stock will be converted into .7757 of a share of common stock, par
value $1.00 per share, of AT&T ("AT&T Common Stock"), (ii) each share
of TCI Group Series B Stock will be converted into .8533 of a share of
AT&T Common Stock, (iii) each share of Liberty Group Series A Stock
will be converted into one share of a newly authorized class of AT&T
Common Stock to be designated as the Class A Liberty Group Common
Stock, par value $1.00 per share (the "AT&T Liberty Class A Tracking
Stock") and (iv) each share of Liberty Group Series B Stock will be
converted into one share of a newly authorized class of AT&T Common
Stock to be designated as the Class B Liberty Group Common Stock, par
value $1.00 per share (the "AT&T Liberty Class B Tracking Stock" and
together with the AT&T Liberty Class A Tracking Stock, the "AT&T
Liberty Tracking Stock"). In addition, TCI has announced its intention,
subject to stockholder approval, to combine the assets and businesses
of Liberty Media Group and TCI Ventures Group and reclassify each share
of TCI Ventures Group Series A Stock as .52 of a share of Liberty Group
Series A Stock and each share of TCI Ventures Group Series B Stock as
.52 of a share of Liberty Group Series B Stock. If such combination and
reclassification does not occur prior to the Merger, then in the
Merger, each share of TCI Ventures Group Series A Stock and TCI
Ventures Group Series B Stock will be converted into .52 of a share of
the corresponding series of AT&T Liberty Tracking Stock. In general,
the holders of shares of AT&T Liberty Class A Tracking Stock and the
holders of shares of AT&T Liberty Class B Tracking Stock will vote
together as a single class with the holders of shares of AT&T Common
Stock on all matters presented to such stockholders, with the holders
being entitled to one-tenth (1/10th) of a vote for each share of AT&T
Liberty Class A Tracking Stock held, 1 vote per share of AT&T Liberty
Class B Tracking Stock held, and 1 vote per share of AT&T Common Stock
held.
Under the terms of the Company's Cumulative Exchangeable Preferred
Stock, Series A (the "Series A Preferred Stock"), from and after
January 15, 2001 (the "Initial Exchange Date") each share of the Series
A Preferred Stock will be exchangeable for 2.119 shares of TCI Group
Series A Stock, subject to certain anti-dilution adjustments. If the
Merger is consummated, under the terms of the Series A Preferred Stock,
each share of that stock will become exchangeable, from and after the
Initial Exchange Date, for 1.644 shares of AT&T Common Stock, subject
to certain anti-dilution adjustments. In addition, after the Merger,
the Company may elect to make any dividend, redemption or liquidation
payment on the Series A Preferred Stock in cash, by delivery of shares
of AT&T Common Stock or by a combination of the foregoing forms of
consideration.
(continued)
I-8
<PAGE> 10
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
The shares of AT&T Liberty Tracking Stock to be issued in the Merger
will be a newly authorized class of common stock of AT&T which will be
intended to reflect the separate performance of the businesses and
assets attributed to the "Liberty/Ventures Group," which following the
Merger, will be made up of the businesses and assets which are
attributed to Liberty Media Group and TCI Ventures Group at the time of
the Merger. Pursuant to the Merger Agreement, immediately prior to the
Merger, certain assets currently attributed to TCI Ventures Group
(including, among others, the shares of AT&T Common Stock received in
the merger of AT&T and Teleport Communications Group, Inc., the stock
of At Home Corporation attributed to TCI Ventures Group, the assets and
business of the National Digital Television Center, Inc. ("NDTC"), and
TCI Ventures Group's equity interest in Western Tele-Communications,
Inc.) will be transferred to TCI Group in exchange for approximately
$5.5 billion in cash. Also, upon consummation of the Merger, through a
new tax sharing agreement between Liberty/Ventures Group and AT&T,
Liberty/Ventures Group will become entitled to the benefit of all of
the net operating loss carryforwards available to the entities included
in TCI's consolidated income tax return as of the date of the Merger.
Additionally, certain warrants currently attributed to TCI Group will
be transferred to Liberty/Ventures Group in exchange for up to $176
million in cash. Certain agreements to be entered into at the time of
the Merger as contemplated by the Merger Agreement will, among other
things, provide preferred vendor status to Liberty/Ventures Group for
digital basic distribution on AT&T's systems of new programming
services created by Liberty/Ventures Group and its affiliates, provide
for a renewal of existing affiliation agreements and provide for the
business of the Liberty/Ventures Group to continue to be managed
following the Merger by certain members of TCI's management who
currently manage the businesses of Liberty Media Group and TCI Ventures
Group.
If TCI terminates the Merger Agreement due to (i) the failure of AT&T's
stockholders to approve the Merger prior to March 31, 1999, (ii) the
withdrawal or modification by the AT&T Board of Directors of its
approval of the transaction, or (iii) the failure to obtain necessary
governmental and regulatory approvals by September 30, 1999, which
failure occurs as a result of the announcement by AT&T of a significant
transaction which delays receipt of such governmental approvals, AT&T
will pay to TCI the sum of $1.75 billion in cash. If AT&T terminates
the Merger Agreement, under certain circumstances, including the
failure of TCI stockholders to approve the transaction prior to March
31, 1999 or the withdrawal or modification by the TCI Board of
Directors of its approval of the Merger, TCI will pay to AT&T the sum
of $1.75 billion in cash.
Consummation of the Merger is subject to the satisfaction or waiver of
customary conditions to closing, including but not limited to, the
separate approvals of the stockholders of AT&T and TCI, receipt of all
necessary governmental consents and approvals, and effectiveness of the
registration statement registering the AT&T Common Stock and AT&T
Liberty Tracking Stock to be issued to TCI stockholders in the Merger.
As a result, there can be no assurance that the Merger will be
consummated or, if the Merger is consummated, as to the date of such
consummation.
(continued)
I-9
<PAGE> 11
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $822 million and $918 million for the nine
months ended September 30, 1998 and 1997, respectively. Cash paid for
income taxes was $11 million and $7 million for the nine months ended
September 30, 1998 and 1997, respectively.
Summary of cash paid for acquisitions and cash received in exchanges is
as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1998 1997
----- -----
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Recorded value of assets acquired $(283) (211)
Net liabilities assumed -- 54
Deferred tax liability recorded in acquisitions 36 --
Acquisition of minority interests in equity of
acquired entities (4) (3)
Elimination of notes receivable from affiliates 129 --
----- -----
Cash paid for acquisitions $(122) (160)
===== =====
Cash received in exchanges:
Recorded value of assets acquired $ (72) (392)
Historical cost of assets disposed of 87 399
Gain recorded on exchange of assets 30 11
----- -----
Cash received in exchanges $ 45 18
===== =====
</TABLE>
For a description of certain non-cash transactions, see notes 5, 6 and
9.
The Company's restricted cash is primarily comprised of proceeds
received in connection with certain asset dispositions. Such proceeds,
which aggregated $353 million and $34 million at September 30,1998 and
December 31, 1997, are designated to be reinvested in certain
identified assets for income tax purposes.
(continued)
I-10
<PAGE> 12
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(4) Investment in Cablevision Systems Corporation
On March 4, 1998, subsidiaries of TCI (including certain subsidiaries
of TCIC) contributed to CSC certain of its cable television systems
serving approximately 830,000 customers in exchange for approximately
48.9 million newly issued CSC Class A common shares (as adjusted for a
two-for-one stock split) (the "CSC Transaction"). CSC also assumed and
repaid approximately $574 million of debt owed by TCIC to external
parties and $95 million of debt owed to TCI. As a part of such
transaction, TCIC subsidiaries contributed to CSC cable television
systems serving approximately 410,000 customers in exchange for
approximately 28.0 million shares (as adjusted for a two-for-one stock
split) of CSC's newly issued Class A common shares, and CSC assumed
approximately $78 million of intercompany debt owed to TCIC. As a
result of the CSC Transaction, TCIC recognized a $148 million gain in
the accompanying consolidated statement of operations for the nine
months ended September 30, 1998. Such gain represents the excess of the
$663 million fair value of the CSC Class A common shares received over
the historical cost of the net assets transferred by TCIC to CSC. TCIC
has also entered into letters of intent with CSC which provide for TCIC
to acquire a cable system in Michigan and an additional 3% of CSC's
Class A common shares and for CSC to (i) acquire cable systems serving
approximately 250,000 customers in Connecticut and (ii) assume $110
million of TCIC's debt. The ability of TCIC to sell or increase its
investment in CSC is subject to certain restrictions and limitations
set forth in a stockholders agreement with CSC.
At September 30, 1998, subsidiaries of TCI (including certain
subsidiaries of TCIC) owned 49,982,572 shares of CSC Class A common
stock (as adjusted for a two-for-one stock split), which had a closing
market price of $43.19 per share on such date. Such shares represented
an approximate 33.2% equity interest in CSC's total outstanding shares
and an approximate 9% voting interest in CSC in all matters except for
(i) the election of directors, in which case TCI effectively has the
right to designate two of CSC's directors, and (ii) any increase in
authorized shares, in which case TCI has agreed to vote its interest in
proportion with the public holders of CSC Class A common shares. At
September 30, 1998, TCIC owned 27,951,048 shares of CSC Class A common
stock (as adjusted for a two-for-one stock split). Such shares
represented an approximate 18.6% equity interest in CSC's total
outstanding shares. In light of TCI's overall ownership interest in
CSC, TCIC accounts for its approximate 18.6% ownership interest in CSC
under the equity method.
(continued)
I-11
<PAGE> 13
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Summarized unaudited results of operations for CSC, accounted for under
the equity method, are as follows for the period from the date of
acquisition through September 30, 1998 (amounts in millions):
<TABLE>
<CAPTION>
<S> <C>
Revenue $ 1,848
Operating, selling, general and administrative
expenses (1,428)
Depreciation and amortization (407)
-------
Operating income 13
Interest expense (255)
Other, net (70)
-------
Net loss $ (312)
=======
</TABLE>
(5) Investments in Other Affiliates
TCIC's investments in affiliates other than CSC are comprised of
limited partnerships and other entities that are primarily engaged in
the domestic cable business. Summarized unaudited results of operations
for other affiliates for the periods in which the Company used the
equity method to account for such other affiliates are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
------------------- -------------------
1998 1997
----- -----
amounts in millions
<S> <C> <C>
Revenue $ 408 356
Operating, selling, general and
administrative expenses (214) (179)
Depreciation and amortization (154) (147)
----- -----
Operating income 40 30
Interest expense (81) (78)
Other, net 4 44
----- -----
Net loss $ (37) (4)
===== =====
</TABLE>
In January 1998, InterMedia Partners ("InterMedia Partners"), a
California limited partnership and an equity affiliate of TCI through
December 31, 1997, repurchased substantially all of the equity
interests held by partners other than TCIC. As a result of such
repurchases, TCIC began consolidating InterMedia Partners.
Certain of TCIC's affiliates are general partnerships and any
subsidiary of TCIC that is a general partner in a general partnership
is, as such, liable as a matter of partnership law for all debts (other
than non-recourse debts) of that partnership in the event liabilities
of that partnership were to exceed its assets.
(continued)
I-12
<PAGE> 14
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(6) Acquisitions and Dispositions
In addition to the CSC Transaction described in note 4, TCIC completed,
during the first nine months of 1998, six transactions whereby TCIC
contributed cable television systems serving in the aggregate
approximately 1,224,000 customers to six separate joint ventures
(collectively, the "1998 Joint Ventures") in exchange for
non-controlling ownership interests in each of the 1998 Joint Ventures,
and the assumption and repayment by the 1998 Joint Ventures of debt
owed by TCIC to external parties aggregating $323 million and
intercompany debt owed to TCIC aggregating $1,524 million. TCIC has
agreed to take certain steps to support compliance by certain of the
1998 Joint Ventures with their payment obligations under certain debt
instruments, up to an aggregate contingent commitment of $980 million.
In light of such contingent commitments, the Company has deferred any
gains on the formation of such 1998 Joint Ventures. Accordingly, the
Company has recorded deferred gains aggregating $163 million and
recognized net gains aggregating $260 million in connection with the
formation of the 1998 Joint Ventures. The deferred gains will not be
recognized until such time as the Company's contingent commitments are
eliminated. The Company uses the equity method of accounting to account
for its investments in the 1998 Joint Ventures. The CSC Transaction
(see note 4) and the formation of the 1998 Joint Ventures are
collectively referred to herein as the "1998 Contribution
Transactions."
Including the 1998 Contribution Transactions, TCIC, as of September 30,
1998, has, since January 1, 1997, contributed, or signed agreements or
letters of intent to contribute within the next twelve months, certain
cable television systems (the "Contributed Cable Systems") serving
approximately 3.5 million basic customers to joint ventures in which
TCIC will retain non-controlling ownership interests (the "Contribution
Transactions"). Following the completion of the Contribution
Transactions, TCIC will no longer consolidate the Contributed Cable
Systems. Accordingly, it is anticipated that the completion of the
Contribution Transactions, as currently contemplated, will result in an
aggregate estimated reduction (based on actual amounts with respect to
the 1998 Contribution Transactions and currently contemplated amounts
with respect to the pending Contribution Transactions) to TCIC's debt
of $4.2 billion and aggregate estimated reductions (based on 1997
amounts) to TCIC's annual revenue and annual operating income before
depreciation, amortization and other non-cash items and stock
compensation of $1.5 billion and $735 million, respectively. No
assurance can be given that any of the pending Contribution
Transactions will be consummated.
(continued)
I-13
<PAGE> 15
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
amounts in millions
<S> <C> <C>
Parent company debt:
Notes payable (a) $ 8,580 7,949
Commercial paper 830 533
------- -------
9,410 8,482
Debt of subsidiaries:
Bank credit facilities (b) 2,063 4,268
Notes payable (a) 550 723
Convertible notes (c) 40 40
Capital lease obligations
and other debt 181 15
------- -------
$12,244 13,528
======= =======
</TABLE>
(a) During the nine months ended September 30, 1998, TCIC
purchased certain notes payable which had an aggregate
principal balance of $352 million and fixed interest rates
ranging from 8.67% to 10.25% (the "1998 Purchases"). In
connection with the 1998 Purchases, TCIC recognized a loss on
early extinguishment of debt of $44 million. Such loss related
to prepayment penalties amounting to $39 million and the
retirement of deferred loan costs.
During the nine months ended September 30, 1997, TCIC
purchased certain notes payable which had an aggregate
principal balance of $190 million and fixed interest rates
ranging from 8.75% to 10.13% (the "1997 Purchases"). In
connection with the 1997 Purchases, TCIC recognized a loss on
early extinguishment of debt of $11 million. Such loss related
to prepayment penalties amounting to $7 million and the
retirement of deferred loan costs.
(b) At September 30, 1998, TCIC had approximately $2.1 billion of
availability in unused lines of credit, excluding amounts
related to lines of credit which provide availability to
support commercial paper. TCIC is required to maintain unused
availability under bank credit facilities to the extent of
outstanding commercial paper. Also, TCIC pays fees ranging to
1/2% per annum on the average unborrowed portion of the total
amount available for borrowings under bank credit facilities.
(continued)
I-14
<PAGE> 16
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(c) The convertible notes, which are stated net of unamortized
discount of $166 million at September 30, 1998 and December
31, 1997, mature on December 18, 2021. The notes require, so
long as conversion of the notes has not occurred, an annual
interest payment through 2003 equal to 1.85% of the face
amount of the notes. At September 30, 1998, the notes were
convertible, at the option of the holders, into an aggregate
of 24,163,259 shares of TCI Group Series A Stock, 19,416,910
shares of Liberty Group Series A Stock, 20,711,373 shares of
TCI Ventures Group Series A Stock and 3,451,897 shares of
Series A Common Stock, $1.00 par value per share, of TCI
Satellite Entertainment, Inc.
TCIC's bank credit facilities and various other debt instruments
generally contain restrictive covenants which require, among other
things, the maintenance of certain earnings, specified cash flow and
financial ratios (primarily the ratios of cash flow to total debt and
cash flow to debt service, as defined), and include certain limitations
on indebtedness, investments, guarantees, dispositions, stock
repurchases and/or dividend payments.
The fair value of TCIC's debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered
to TCIC for debt of the same remaining maturities. At September 30,
1998, the fair value of TCIC's debt was $15,263 million (including
$2,039 million attributable to the value of the common stock underlying
the convertible notes), as compared to a carrying value of $12,244
million on such date.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company may enter into variable and fixed interest
rate exchange agreements ("Interest Rate Swaps") pursuant to which it
(i) pays fixed interest rates (the "Fixed Rate Agreements") and
receives variable interest rates and (ii) pays variable interest rates
(the "Variable Rate Agreements") and receives fixed interest rates.
During the nine months ended September 30, 1998 and 1997, the Company's
net payments pursuant to the Fixed Rate Agreements were less than $1
million for each period; and the Company's net receipts pursuant to the
Variable Rate Agreements were $8 million and $1 million, respectively.
At September 30, 1998, all of the Company's Fixed Rate Agreements had
expired.
(continued)
I-15
<PAGE> 17
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Information concerning TCIC's Variable Rate Agreements at September 30,
1998 is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to be
Expiration Interest rate Notional received upon
date to be received amount termination (a)
---------- -------------- -------- ---------------
<S> <C> <C> <C>
April 1999 7.4% 50 1
September 1999 6.4% 350 4
February 2000 5.8%-6.6% 300 5
March 2000 5.8%-6.0% 675 8
September 2000 5.1% 75 --
March 2027 9.7% 300 44
December 2030 9.7% 200 16
------ ------
$1,950 $ 78
====== ======
</TABLE>
- ----------
(a) The estimated amount that TCIC would receive to terminate the
agreements at September 30, 1998, taking into consideration
current interest rates and the current creditworthiness of the
counterparties, represents the fair value of the Interest Rate
Swaps.
In addition to the Variable Rate Agreements, TCIC entered into Interest
Rate Swaps pursuant to which it pays a variable rate based on the
London Interbank Offered Rate ("LIBOR") (5.8% at September 30, 1998)
and receives a variable rate based on the Constant Maturity Treasury
Index ("CMT") (4.7% at September 30, 1998) on a notional amount of $400
million through September 2000; and pays a variable rate based on LIBOR
(5.7% at September 30, 1998) and receives a variable rate based on CMT
(4.8% at September 30, 1998) on notional amounts of $95 million through
February 2000. During the nine months ended September 30, 1998, TCIC's
net payments pursuant to such agreements were less than $1 million. At
September 30, 1998, TCIC would be required to pay an estimated $4
million to terminate such Interest Rate Swaps.
TCIC is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of
nonperformance by the other parties to the agreements. However, TCIC
does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
Further, TCIC does not anticipate material near-term losses in future
earnings, fair values or cash flows resulting from derivative financial
instruments as of September 30, 1998.
(continued)
I-16
<PAGE> 18
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(8) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of the
Company
The Trust Preferred Securities are presented together in a separate
line item in the accompanying consolidated balance sheets captioned
"Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debt securities of the
Company." Dividends accrued on the Trust Preferred Securities
aggregated $106 million and $96 million for the nine months ended
September 30, 1998 and 1997, respectively, and are included in minority
interests in earnings of consolidated subsidiaries in the accompanying
consolidated financial statements.
(9) Related Party Transactions
At September 30, 1998, amounts due from related parties are comprised
of (i) $73 million representing the net amount due from TCI and certain
subsidiaries of TCI pursuant to promissory notes, including accrued
interest, and (ii) $97 million representing the net amount due from TCI
pursuant to a non-interest bearing intercompany account. The net
intercompany interest income earned on the promissory notes aggregated
$5 million and $11 million during the nine months ended September 30,
1998 and 1997, respectively.
As a part of a legal restructuring that was completed in connection
with the April 30, 1998 formation of one of the 1998 Joint Ventures,
TCI transferred 50% of its 100% ownership interest in TKR Cable
Partners to the Company. At the time of the transfer, TKR Cable
Partners owned a 30% interest in TCI TKR L.P., a 70%-owned subsidiary
of the Company and the parent of TCI TKR Cable II, Inc. ("TCI TKR II").
Upon completion of the restructuring, TCI's 30% minority ownership
interest in TCI TKR L.P. was eliminated and TCI and the Company each
became an owner of a 50% interest in TCI TKR II. In connection with the
restructuring, the historical cost of the net assets received was
reflected as a $130 million decrease to the amount due from related
parties.
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group and TCI Ventures Group at rates set at the
beginning of the year based on projected utilization for that year.
During the nine months ended September 30, 1998 and 1997, Liberty Media
Group was allocated $4 million and $1 million, respectively, and TCI
Ventures Group was allocated $8 million and $7 million, respectively,
in corporate general and administrative costs by TCIC. Such amounts are
included in selling, general and administrative expenses in the
accompanying consolidated financial statements.
(continued)
I-17
<PAGE> 19
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
During 1996, TCIC transferred, subject to regulatory approval, certain
distribution equipment to a majority-owned subsidiary of TCI that is
attributed to TCI Ventures Group in exchange for a (pound)15 million
($23 million using the applicable exchange rate) principal amount
promissory note (the "TVG LLC Promissory Note"). The TVG LLC Promissory
Note was contributed by TCIC to TCI Ventures Group on September 10,
1997. The distribution equipment was subsequently leased back to TCIC
over a five year term with semi-annual payments of $2 million, plus
expenses. Effective October 1, 1997, such distribution equipment was
transferred back to TCIC and the related lease and the TVG LLC
Promissory Note were canceled. During the nine months ended September
30, 1997, (i) the U.S. dollar equivalent of interest income earned with
respect to the TVG LLC Promissory Note was $1 million and (ii) the U.S.
dollar equivalent of the lease expense under the above-described lease
agreement aggregated $3 million.
Through June 30, 1997, TCI Starz, Inc. ("TCI Starz"), a subsidiary of
TCI, had a 50.1% partnership interest in QE+ Ltd. ("QE+"), which
distributes "STARZ!", a first-run movie premium programming service.
Another subsidiary of TCI, Liberty Media Corporation ("Liberty") held
the remaining 49.9% partnership interest, and TCIC was a party to an
affiliation agreement (the "Old Affiliation Agreement") with QE+
related to the distribution of the STARZ! service.
Subsequent to June 30, 1997, Liberty and TCI Starz entered into a
series of transactions pursuant to which, among other matters, the
business of STARZ! and Encore Media Corporation were contributed to a
newly formed limited liability company ("Encore Media Group"). Upon
consummation of the transactions, Liberty owned 100% of Encore Media
Group.
In connection with the formation of Encore Media Group, the Old
Affiliation Agreement was canceled, and the Company and a subsidiary of
Encore Media Group entered into a new affiliation agreement (the "EMG
Affiliation Agreement"). Pursuant to the EMG Affiliation Agreement, the
Company pays fixed monthly amounts in exchange for unlimited access to
all of the existing Encore and STARZ! services. The fixed annual
amounts increase annually from $220 million in 1998 to $315 million in
2003, and will increase with inflation thereafter through 2022.
Charges to TCIC for programming pursuant to the Old Affiliation
Agreement, the EMG Affiliation Agreement and other related party
programming agreements with certain other TCI subsidiaries attributed
to Liberty Media Group aggregated $163 million and $75 million for the
nine months ended September 30, 1998 and 1997, respectively. Such
charges are based upon customary rates charged to others, and are
included in operating costs and expenses in the accompanying
consolidated statements of operations.
(continued)
I-18
<PAGE> 20
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Pursuant to an agreement between TCI Music, Inc., a subsidiary of TCI
("TCI Music"), and TCI, certain subsidiaries of TCIC are required to
deliver to TCI Music monthly revenue payments aggregating $18 million
annually (adjusted annually for inflation) through 2017. During the
nine months ended September 30, 1998 and 1997, the aggregate amount
paid by TCIC to TCI Music pursuant to such arrangement was $14 million
and $5 million, respectively. Such amounts are included as reductions
of revenue in the accompanying consolidated statements of operations.
A subsidiary of TCI that was attributed to TCI Ventures Group leases
certain equipment under a capital lease. During 1997, such equipment
was subleased to TCIC under an operating lease. In January 1998, the
Company paid $7 million to TCI Ventures Group in exchange for TCI
Ventures Group's assignment of its ownership interest in such
subsidiary to TCIC. Due to the related party nature of the transaction,
the $50 million total of the cash payment and the historical cost of
the net liabilities assumed by TCIC (including capital lease
obligations aggregating $176 million) has been reflected as an increase
of TCIC's common stockholder's deficit.
Through September 30, 1997, Liberty Media Group leased satellite
transponder facilities from a subsidiary of TCIC. Charges by TCIC for
such lease arrangements aggregated $4 million for the nine months ended
September 30, 1997. Such amounts are included in operating costs and
expenses in the accompanying consolidated statements of operations.
Since October 1, 1997, TCIC has leased satellite transponder facilities
and receives video transport services from entities attributed to TCI
Ventures Group. Charges by TCI Ventures Group for such arrangements and
other related operating expenses for the nine months ended September
30, 1998 aggregated $10 million. Such amounts are included in operating
costs and expenses in the accompanying consolidated statements of
operations.
In addition, a subsidiary attributed to TCI Ventures Group distributes
certain program services to TCIC. Charges to TCIC for such services
aggregated $7 million for each of the nine months ended September 30,
1998 and 1997, and are included in operating costs and expenses in the
accompanying consolidated financial statements.
TCIC distributed certain program services to a subsidiary attributed to
TCI Ventures Group. The charges, which approximate TCIC's cost,
aggregated $4 million and $5 million for the nine months ended
September 30, 1998 and 1997, respectively. Amounts received by TCIC
pursuant to this arrangement are included in operating costs and
expenses in the accompanying consolidated financial statements.
(continued)
I-19
<PAGE> 21
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(10) Commitments and Contingencies
On October 5, 1992, the United States Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). In 1993 and 1994, the Federal Communications Commission
("FCC") adopted certain rate regulations required by the 1992 Cable Act
and imposed a moratorium on certain rate increases. As a result of such
actions, TCIC's basic and tier service rates and its equipment and
installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. Basic and
tier service rates are evaluated against competitive benchmark rates as
published by the FCC, and equipment and installation charges are based
on actual costs. Any rates for Regulated Services that exceeded the
benchmarks were reduced as required by the 1993 and 1994 rate
regulations. The rate regulations do not apply to the relatively few
systems which are subject to "effective competition" or to services
offered on an individual service basis, such as premium movie and
pay-per-view services.
TCIC believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including its rate setting
provisions. However, TCIC's rates for Regulated Services are subject to
review by the FCC, if a complaint is filed by a customer, or the
appropriate franchise authority, if such authority has been certified
by the FCC to regulate rates. If, as a result of the review process, a
system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund
the excess portion of rates received. Any refunds of the excess portion
of tier service rates would be retroactive to the date of complaint.
Any refunds of the excess portion of all other Regulated Service rates
would be retroactive to one year prior to the implementation of the
rate reductions.
TCIC has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $208
million at September 30, 1998. With respect to TCIC's guarantees of
$166 million of such obligations, TCIC has been indemnified for any
loss, claim or liability that TCIC may incur, by reason of such
guarantees. As described in note 6, TCIC also has provided certain
credit enhancements with respect to the 1998 Joint Ventures. The
Company also has guaranteed the performance of certain affiliates and
other parties with respect to such parties' contractual and other
obligations. Although there can be no assurance, management of TCIC
believes that it will not be required to meet its obligations under
such guarantees, or if it is required to fulfill any of such
obligations, that they will not be material to TCIC.
(continued)
I-20
<PAGE> 22
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
TCIC is a direct obligor or guarantor of the payment of certain amounts
that may be due pursuant to motion picture output, distribution and
license agreements. As of September 30, 1998, the amount of such
obligations or guarantees was approximately $273 million. The future
obligations of TCIC with respect to these agreements is not currently
determinable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture
studios as well as the domestic theatrical exhibition receipts upon the
release of such qualifying films.
As described in note 9, TCIC has agreed to make fixed monthly payments
through 2022 to Liberty Media Group pursuant to the EMG Affiliation
Agreement.
TCIC is a party to affiliation agreements with programming suppliers.
Pursuant to certain of such agreements, TCIC is committed to carry such
suppliers' programming on its cable systems. Additionally, certain of
such agreements provide for penalties and charges in the event the
programming is not carried or not delivered to a contractually
specified number of customers.
TCIC is committed to purchase billing services pursuant to three
successive five year agreements. Pursuant to such arrangement, TCIC is
obligated at September 30, 1998 to make minimum payments aggregating
approximately $1.6 billion through 2012. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.
Pursuant to certain agreements between TCI and TCI Music, TCIC is
obligated at September 30, 1998 to make minimum revenue payments
through 2017 and minimum license fee payments through 2007 aggregating
approximately $412 million to TCI Music. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.
Certain officers and other key employees of TCIC hold options with
tandem stock appreciation rights to acquire TCI Group Series A Stock,
Liberty Group Series A Stock and TCI Ventures Group Series A Stock as
well as restricted stock awards of TCI Group Series A Stock, Liberty
Group Series A Stock and TCI Ventures Group Series A Stock. Estimates
of (i) the compensation liability relating to stock appreciation rights
granted to such employees of TCIC and (ii) TCIC's allocable portion of
the compensation liability with respect to stock appreciation rights
held by certain officers and directors of TCI have been recorded in
TCIC's consolidated financial statements. Such estimates are subject to
future adjustment based upon vesting of the related stock options and
stock appreciation rights and the market values of TCI Group Series A
Stock, Liberty Group Series A Stock and TCI Ventures Group Series A
Stock and, ultimately, on the final determination of market values when
such rights are exercised.
(continued)
I-21
<PAGE> 23
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
TCIC has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is
reasonably possible TCIC may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In
the opinion of management, it is expected that amounts, if any, which
may be required to satisfy such contingencies will not be material in
relation to the accompanying consolidated financial statements.
Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
cable operators that may be designated from time to time by NDTC
("Approved Purchasers"), entered into an agreement (the "Digital
Terminal Purchase Agreement") with General Instrument Corporation
("GI") to purchase advanced digital set-top devices. The hardware and
software incorporated into these devices will be designed and
manufactured to be compatible and interoperable with the OpenCable(TM)
architecture specifications adopted by CableLabs, the cable television
industry's research and development consortium, in November 1997. NDTC
has agreed that Approved Purchasers will purchase, in the aggregate, a
minimum of 6.5 million set-top devices during calendar years 1998, 1999
and 2000 at an average price of $318 per basic set-top device. Through
September 30, 1998, approximately 1 million set-top devices had been
purchased pursuant to this commitment. GI agreed to provide NDTC and
its Approved Purchasers the most favorable prices, terms and conditions
made available by GI to any customer purchasing advanced digital
set-top devices. In connection with NDTC's purchase commitment, GI
agreed to grant warrants to purchase its common stock proportional to
the number of devices ordered by each organization, which as of the
effective date of the Digital Terminal Purchase Agreement, would have
represented at least a 10% equity interest in GI (on a fully diluted
basis). Such warrants vest as annual purchase commitments are met. The
value associated with such equity interest will be attributed to TCI
Group upon purchase and deployment of the digital set-top devices. See
note 2. NDTC has the right to terminate the Digital Terminal Purchase
Agreement if, among other reasons, GI fails to meet a material
milestone designated in the Digital Terminal Purchase Agreement with
respect to the development, testing and delivery of advanced digital
set-top devices.
On June 30, 1998, TCIC entered into an Operating Lease Agreement (the
"Lease") with an unaffiliated third party (the "Lessor"). Under the
Lease, TCIC agreed to sell to and lease back from the Lessor advanced
digital set-top devices with an initial aggregate net cost of up to
$200 million. The initial term of the lease is two years, and it
provides for renewal, at TCIC's option, for up to five additional
consecutive one-year terms. Rent under the lease is payable quarterly.
At the end of the originally scheduled or renewed lease term, TCIC is
required to either (i) purchase the equipment at the Termination Value
(as defined in the lease), or (ii) arrange for the sale of the leased
equipment to a third party and pay the Lessor the difference between
the sale price and a predetermined guaranteed value, which in all cases
is less than the Termination Value. As of September 30, 1998, TCIC has
sold and leased back advanced digital set-top devices under the Lease
with an aggregate cost of $109 million. Current annual lease payments
with respect to such leased equipment are $16 million. The Company has
treated the Lease as an operating lease in the accompanying
consolidated financial statements.
(continued)
I-22
<PAGE> 24
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(11) Year 2000 Costs
During the three months ended September 30, 1998, TCI continued its
enterprise-wide, comprehensive efforts to assess and remediate its
computer systems and related software and equipment to ensure such
systems, software and equipment recognize, process and store
information in the year 2000 and thereafter. TCI's year 2000
remediation efforts include an assessment of TCIC's most critical
systems, such as customer service and billing systems, headends and
other cable plant, business support operations, and other equipment and
facilities. TCI also continued its efforts to verify the year 2000
readiness of TCIC's significant suppliers and vendors and continued to
communicate with significant business partners and affiliates to assess
such partners and affiliates' year 2000 status.
TCI formed a year 2000 Program Management Office (the "PMO") to
organize and manage its year 2000 remediation efforts. The PMO is
responsible for overseeing, coordinating and reporting on TCIC's year
2000 remediation efforts. It is comprised of a 90-member full-time
staff and is accountable to executive management of TCIC.
The PMO has defined a four-phase approach to determining the year 2000
readiness of TCIC's systems, software and equipment. Such approach is
intended to provide a detailed method for tracking the evaluation,
repair and testing of TCIC's systems, software and equipment. Phase 1,
Assessment, involves the inventory of all systems, software and
equipment and the identification of any year 2000 issues. Phase 1 also
includes the preparation of the work plans needed for remediation.
Phase 2, Remediation, involves repairing, upgrading and/or replacing
any non-compliant equipment and systems. Phase 3, Testing, involves
testing TCIC's systems, software, and equipment for year 2000
readiness, or in certain cases, relying on test results provided to
TCIC. Phase 4, Implementation, involves placing compliant systems,
software and equipment into production or service.
At September 30, 1998, TCIC's overall progress by phase was as follows:
Percentage of all
Equipment/Systems
Phase In Phase*
Phase 1-Assessment 89%
Phase 2-Remediation 37%
Phase 3-Testing 9%
Phase 4-Implementation 14%
---------------------
*The percentages set forth above do not total 100% because many
projects have elements in more than one phase. For purposes of this
table, such projects have been attributed to each applicable phase. In
addition, the percentages set forth above are based on the number of
projects in each phase compared to the total number of Year 2000
projects.
(continued)
I-23
<PAGE> 25
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
TCIC is completing an inventory of its important systems with embedded
technologies and is currently determining the correct remediation
approach. During the three months ended September 30, 1998, TCIC
continued its survey of significant third-party vendors and suppliers
whose systems, services or products are important to TCIC's operations
(e.g., suppliers of addressable controllers and set-top boxes, and the
provider of billing services). The year 2000 readiness of such
providers is critical to continued provision of TCIC's cable service.
TCIC has received information that the most critical systems, services
or products supplied to TCIC by third parties are either year 2000
ready or are expected to be year 2000 ready by mid-1999. TCIC is
currently developing contingency plans for systems provided by vendors
who have not responded to TCIC's surveys.
In addition to the survey process described above, management of TCIC
has identified its most critical supplier/vendor relationships and has
instituted a verification process to determine the vendors' year 2000
readiness. Such verification includes, as deemed necessary, reviewing
vendors' test and other data and engaging in regular conferences with
vendors' year 2000 teams. TCIC is also requiring testing to validate
the year 2000 compliance of certain critical products and services and
is contracting with independent consultants to conduct such testing.
Significant market value is associated with TCIC's investments in
certain public and private corporations, partnerships and other
businesses. Accordingly, TCIC is monitoring the public disclosure of
such publicly-held business entities to determine their year 2000
readiness. In addition, TCIC has surveyed and monitored the year 2000
status of certain privately-held business entities in which TCIC has
significant investments.
Year 2000 expenses and capital expenditures incurred in the three
months ended September 30, 1998 were $3 million and less than $1
million, respectively. Expenses and capital expenditures incurred in
the nine months ended September 30, 1998 were $3 million and less than
$1 million, respectively. Management of TCIC currently estimates the
remaining costs to be not less than $54 million, bringing the total
estimated cost associated with TCIC's year 2000 remediation efforts to
be not less than $57 million, including TCIC's pro rata share of the
$32 million cost for replacement of noncompliant information technology
("IT") systems. Also included in this estimate is TCIC's pro rata share
of the $9 million in future payments to be made by the PMO pursuant to
unfulfilled executory contracts or commitments with vendors for year
2000 remediation services.
TCIC is a widely distributed enterprise in which allocation of certain
resources, including IT support, is decentralized. Accordingly, neither
TCI nor TCIC consolidates an IT budget. Therefore, total estimated year
2000 costs as a percentage of an IT budget are not available. There are
currently no planned IT projects being deferred due to year 2000 costs.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. There
can be no assurance that TCIC's systems or the systems of other
companies on which TCIC relies will be converted in time or that any
such failure to convert by TCIC or other companies will not have a
material adverse effect on its financial position, results of
operations or cash flows.
I-24
<PAGE> 26
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information concerning
the results of operations and financial condition of the Company. Such
discussion should be read in conjunction with the accompanying consolidated
financial statements and notes thereto of the Company. Additionally, the
following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and consolidated financial statements included in Part II of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. The
following discussion focuses on material trends, risks and uncertainties
affecting the results of operations and financial condition of the Company.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In particular, some of the statements contained
under this caption are forward-looking. Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of the Company (or
entities in which the Company has interests), or industry results, to differ
materially from future results, performance or achievements expressed or implied
by such forward-looking statements. Such risks, uncertainties and other factors
include, among others: general economic and business conditions and industry
trends; the regulatory and competitive environment of the industries in which
the Company, and the entities in which the Company has interests, operate;
uncertainties inherent in new business strategies; uncertainties inherent in the
changeover to the year 2000, including the Company's projected state of
readiness, the projected cost of remediation, the expected date of completion of
each program or phase, the projected worst case scenarios, and the expected
contingency plans associated with such worst case scenarios; new product
launches and development plans; rapid technological changes; the acquisition,
development and/or financing of telecommunications networks and services; the
development and provision of programming for new television and
telecommunications technologies; future financial performance, including
availability, terms and deployment of capital; the ability of vendors to deliver
required equipment, software and services; availability of qualified personnel;
changes in, or failure or inability to comply with, government regulations,
including, without limitation, regulations of the FCC, and adverse outcomes from
regulatory proceedings; changes in the nature of key strategic relationships
with partners and joint venturers; competitor responses to the Company's
products and services, and the products and services of the entities in which
the Company has interests, and the overall market acceptance of such products
and services; and other factors. These forward-looking statements (and such
risks, uncertainties and other factors) speak only as of the date of this
Report, and the Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein, to reflect any change in the Company's expectations with regard thereto,
or any other change in events, conditions or circumstances on which any such
statement is based. Any statement contained within Management's Discussion and
Analysis of Financial Condition and Results of Operations on this Form 10-Q
related to year 2000 are hereby denominated as "Year 2000 Statements" within the
meaning of the Year 2000 Information and Readiness Disclosure Act.
I-25
<PAGE> 27
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Proposed Merger
TCI and AT&T have agreed to a Merger pursuant to, and subject to the
terms and conditions set forth in, the Merger Agreement dated as of June 23,
1998. In the Merger, TCI will become a wholly-owned subsidiary of AT&T. In
addition, TCI has announced its intention, subject to stockholder approval, to
combine the assets and businesses of Liberty Media Group and TCI Ventures Group.
Consummation of the Merger is subject to the satisfaction or waiver of customary
conditions to closing, including but not limited to, the separate approvals of
the stockholders of AT&T and TCI, receipt of all necessary governmental consents
and approvals, and effectiveness of the registration statement registering the
AT&T Common Stock and AT&T Liberty Tracking Stock to be issued to TCI
stockholders in the Merger. As a result, there can be no assurance that the
Merger will be consummated or, if the Merger is consummated, as to the date of
such consummation. For additional information concerning the Merger, see note 2
to the accompanying consolidated financial statements.
Year 2000
During the three months ended September 30, 1998, TCI continued its
enterprise-wide, comprehensive efforts to assess and remediate its computer
systems and related software and equipment to ensure such systems, software and
equipment recognize, process and store information in the year 2000 and
thereafter. TCI's year 2000 remediation efforts include an assessment of TCIC's
most critical systems, such as customer service and billing systems, headends
and other cable plant, business support operations, and other equipment and
facilities. TCI also continued its efforts to verify the year 2000 readiness of
TCIC's significant suppliers and vendors and continued to communicate with
significant business partners and affiliates to assess such partners and
affiliates' year 2000 status.
TCI formed a year 2000 Program Management Office (the "PMO") to
organize and manage its year 2000 remediation efforts. The PMO is responsible
for overseeing, coordinating and reporting on TCIC's year 2000 remediation
efforts. It is comprised of a 90-member full-time staff and is accountable to
executive management of TCIC.
The PMO has defined a four-phase approach to determining the year 2000
readiness of TCIC's systems, software and equipment. Such approach is intended
to provide a detailed method for tracking the evaluation, repair and testing of
TCIC's systems, software and equipment. Phase 1, Assessment, involves the
inventory of all systems, software and equipment and the identification of any
year 2000 issues. Phase 1 also includes the preparation of the work plans needed
for remediation. Phase 2, Remediation, involves repairing, upgrading and/or
replacing any non-compliant equipment and systems. Phase 3, Testing, involves
testing TCIC's systems, software, and equipment for year 2000 readiness, or in
certain cases, relying on test results provided to TCIC.
Phase 4, Implementation, involves placing compliant systems, software and
equipment into production or service.
I-26
<PAGE> 28
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
At September 30, 1998, TCIC's overall progress by phase was as follows:
<TABLE>
<CAPTION>
Percentage of all
Equipment/Systems Expected
Phase In Phase* Completion Date
------ ----------------- ---------------
<S> <C> <C>
Phase 1-Assessment 89% April 1999
Phase 2-Remediation 37% July 1999
Phase 3-Testing 9% July 1999
Phase 4-Implementation 14% July 1999
</TABLE>
- ---------------------
*The percentages set forth above do not total 100% because many projects have
elements in more than one phase. For purposes of this table, such projects have
been attributed to each applicable phase. In addition, the percentages set forth
above are based on the number of projects in each phase compared to the total
number of Year 2000 projects.
The completion dates set forth above are based on TCIC's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurances can be given as to whether such projects will be
completed on such dates.
TCIC is completing an inventory of its important systems with embedded
technologies and is currently determining the correct remediation approach. The
embedded technologies assessments are expected to be complete by December of
1998.
During the three months ended September 30, 1998, TCIC continued its
survey of significant third-party vendors and suppliers whose systems, services
or products are important to TCIC's operations (e.g., suppliers of addressable
controllers and set-top boxes, and the provider of billing services). The year
2000 readiness of such providers is critical to continued provision of TCIC's
cable service. TCIC has received information that the most critical systems,
services or products supplied to TCIC by third parties are either year 2000
ready or are expected to be year 2000 ready by mid-1999. TCIC is currently
developing contingency plans for systems provided by vendors who have not
responded to TCIC's surveys.
In addition to the survey process described above, management of TCIC
has identified its most critical supplier/vendor relationships and has
instituted a verification process to determine the vendor's year 2000 readiness.
Such verification includes, as deemed necessary, reviewing vendors' test and
other data and engaging in regular conferences with vendors' year 2000 teams.
TCIC is also requiring testing to validate the year 2000 compliance of certain
critical products and services and is contracting with independent consultants
to conduct such testing.
Significant market value is associated with TCIC's investments in
certain public and private corporations, partnerships and other businesses.
Accordingly, TCIC is monitoring the public disclosure of such publicly-held
business entities to determine their year 2000 readiness. In addition, TCIC has
surveyed and monitored the year 2000 status of certain privately-held business
entities in which TCIC has significant investments.
TCIC is monitoring the progress of CSC's year 2000 readiness program
with respect to its investment in CSC. TCIC was informed by CSC that, at
September 30, 1998, a target date of June 1999 had been established for
completion of all remediation and testing of CSC's critical systems. Please
refer to the most recent periodic filings of CSC with the Securities and
Exchange Commission for updated information related to CSC's year 2000 program.
I-27
<PAGE> 29
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Year 2000 expenses and capital expenditures incurred in the three
months ended September 30, 1998 were $3 million and less than $1 million,
respectively. Expenses and capital expenditures incurred in the nine months
ended September 30, 1998 were $3 million and less than $1 million, respectively.
Management of TCIC currently estimates the remaining costs to be not less than
$54 million, bringing the total estimated cost associated with TCIC's year 2000
remediation efforts to be not less than $57 million, including TCIC's pro rata
share of the $32 million cost for replacement of noncompliant IT systems. Also
included in this estimate is TCIC's pro rata share of the $9 million in future
payments to be made by the PMO pursuant to unfulfilled executory contracts or
commitments with vendors for year 2000 remediation services. Although no
assurances can be given, management currently expects that (i) cash flow from
operations will fund the costs associated with year 2000 compliance and (ii) the
total projected cost associated with TCIC's year 2000 program will not be
material to TCIC's financial position, results of operations or cash flows.
TCIC is a widely distributed enterprise in which allocation of certain
resources, including IT support, is decentralized. Accordingly, neither TCI nor
TCIC consolidates an IT budget. Therefore, total estimated year 2000 costs as a
percentage of an IT budget are not available. There are currently no planned IT
projects being deferred due to year 2000 costs.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. Management
believes that its year 2000 program will significantly reduce TCIC's risks
associated with the changeover to the year 2000 and has implemented certain
contingency plans to minimize the effect of any potential year 2000 related
disruptions. The risks and the uncertainties discussed below and the associated
contingency plans relate to systems, software, equipment, and services that TCIC
has deemed critical in regard to customer service, business operations,
financial impact or safety.
The failure of addressable controllers contained in the cable system
headends could disrupt the delivery of premium services to customers and could
necessitate crediting customers for failure to receive such premium services. In
this unlikely event, management expects that it will identify and transmit the
lowest cost programming tier. Unless other contingency plans are developed with
the programmers, premium and adult content channels would not likely be
transmitted until the addressable controller had been repaired.
Customer service networks and/or automated voice response systems
failure could prevent access to customer account information, hamper
installation scheduling and disable the processing of pay-per-view requests.
TCIC plans to have its customer service representatives answer telephone calls
from customers in the event of outages and expects to retrieve needed customer
information manually from the billing service provider.
A failure of the services provided by billing systems service providers
could result in a loss of customer records which could disrupt the ability to
bill customers for a protracted period. TCIC plans to prepare electronic backup
records of its customer billing information prior to the year 2000 to allow for
data recovery. In addition, TCIC continues to monitor the year 2000 readiness of
its key customer-billing suppliers.
Advertising revenue could be adversely affected by the failure of
certain equipment which could impede or prevent the insertion of advertising
spots in TCIC's programming. TCIC anticipates that it can minimize such effect
by manually resetting the dates each day until the equipment is repaired.
I-28
<PAGE> 30
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Security and fire protection systems failure could leave facilities
vulnerable to intrusion and fire. TCIC expects to return such systems to normal
functioning by turning the power off and then on again ("power off/on"). TCIC
also plans to have additional security staff on site and plans to implement a
backup plan for communicating with local fire and police departments. Also,
certain personal computers interface and control elevators, escalators, wireless
systems, public access systems and certain telephony systems. In the event such
computers cease operating, conducting a power off/on is expected to resume
normal functioning. If a power off/on does not resume normal functioning,
management expects to resolve the problem by resetting the computer to a
pre-designated date which precedes the year 2000.
In the event that the local public utility cannot supply power, TCIC
expects to supply power for a limited time to TCIC's cable headends, the NDTC
and office sites through backup generators.
The financial impact of any or all of the above worst-case scenarios
has not been and cannot be estimated by TCIC due to the numerous uncertainties
and variables associated with such scenarios.
If critical systems related to TCIC's cable TV services are not
successfully remediated, TCIC could face claims of breach of contract from
customers of the NDTC, from parties to cable system sale or exchange agreements,
and from certain programming providers. TCIC has not determined the possible
losses from any such claims of breach of contract.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Revenue
The operation of the Company's cable television systems is regulated at
the federal, state and local levels. The 1992 Cable Act and the
Telecommunications Act of 1996 (collectively, the "Cable Acts") established
rules under which the Regulated Services are regulated if a complaint is filed
by a customer or if the appropriate franchise authority is certified by the FCC
to regulate rates. At September 30, 1998, approximately 68% of the Company's
basic customers were served by cable television systems that were subject to
such rate regulation.
During the nine months ended September 30, 1998, 75% of the Company's
revenue was derived from Regulated Services. As noted above, any increases in
rates charged for Regulated Services are regulated by the Cable Acts. Moreover,
competitive factors may limit the Company's ability to increase its service
rates.
During the first nine months of 1998, TCIC consummated the 1998
Contribution Transactions. Since January 1, 1997, TCIC has also consummated
certain other acquisitions and dispositions. Such transactions affect the
comparability of TCIC's results of operations for the three and nine months
ended September 30, 1998 and 1997. For additional information, see notes 4 and 6
to the accompanying consolidated financial statements of the Company.
I-29
<PAGE> 31
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
TCIC's revenue decreased $120 million or 8% for the three months ended
September 30, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the 1998 Contribution Transactions and
other dispositions, revenue increased 3%. Revenue from TCIC's customers
accounted for 3% of such increase in revenue, primarily due to the net effect of
a 5% increase in basic revenue, an increase in revenue from digital products and
an 8% decrease in traditional premium revenue. TCIC experienced a 3% increase in
its average basic rate, an increase in the number of average basic customers of
2%, an 8% decrease in its average rate for traditional premium services and a
decrease of less than 1% in the number of average traditional premium
subscriptions. Additionally, the December 31, 1997 termination of an agreement
pursuant to which TCIC provided fulfillment services to a third party resulted
in a 1% decrease in revenue. Advertising sales and other revenue accounted for a
1% increase in revenue. A significant portion of the increase in advertising
sales is attributable to arrangements with programming suppliers that may not
continue at current levels in future periods.
TCIC's revenue decreased $183 million or 4% for the nine months ended
September 30, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the 1998 Contribution Transactions and
other dispositions, revenue increased 2%. Revenue from TCIC's customers
accounted for 2% of such increase in revenue, primarily due to the net effect of
a 5% increase in basic revenue, an increase in revenue from digital products and
an 11% decrease in traditional premium revenue. TCIC experienced a 5% increase
in its average basic rate, an increase in the number of average basic customers
of less than 1%, a 5% decrease in its average rate for traditional premium
services and a 6% decrease in the number of average traditional premium
subscriptions. Additionally, the December 31, 1997 termination of an agreement
pursuant to which TCIC provided fulfillment services to a third party resulted
in a 1% decrease in revenue. Advertising sales and other revenue accounted for a
1% increase in revenue. A significant portion of the increase in advertising
sales is attributable to arrangements with programming suppliers that may not
continue at current levels in future periods.
Operating Costs and Expenses
Operating expenses decreased $54 million or 9% and $88 million or 5%
for the three months and nine months ended September 30, 1998, respectively, as
compared to the corresponding prior year periods. Exclusive of the effects of
acquisitions, the 1998 Contribution Transactions and other dispositions, such
expenses increased 2% for each respective period. Such increases relate
primarily to higher programming and labor costs, which were partially offset by
reductions attributable to higher capitalized labor and overhead resulting
primarily from increased installation and construction activities. It is
anticipated that TCIC's programming costs will increase in future periods.
I-30
<PAGE> 32
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Selling, general and administrative expenses decreased $3 million or 1%
and increased $53 million or 6% for the three and nine months ended September
30, 1998, respectively, as compared to the corresponding prior year periods.
Exclusive of the effects of acquisitions, the 1998 Contribution Transactions and
other dispositions, such expenses increased 12% and 13%, respectively. Such
increases were due primarily to general increases in expenses relating to the
launch of digital products and other initiatives, and other individually
insignificant increases in general and administrative expenses, which increases
were partially offset by increases in marketing incentives received from
programming suppliers. The majority of such marketing incentives are associated
with the Company's launch of digital services and accordingly may not continue
at current levels in future periods.
Year 2000 costs include fees and other expenses incurred directly in
connection with TCIC's comprehensive efforts to review and correct computer
systems, equipment and related software to ensure readiness for the year 2000.
See detailed discussion above.
Certain officers and other key employees of the Company hold options
with tandem stock appreciation rights to acquire TCI Group Series A Stock,
Liberty Group Series A Stock and TCI Ventures Group Series A Stock as well as
restricted stock awards of TCI Group Series A Stock, Liberty Group Series A
Stock and TCI Ventures Group Series A Stock. Estimates of (i) the compensation
liability relating to stock appreciation rights granted to such employees of the
Company and (ii) the Company's allocable portion of the compensation liability
with respect to stock appreciation rights held by certain officers and directors
of TCI as of September 30, 1998 have been recorded in the Company's consolidated
financial statements. Such estimates are subject to future adjustment based upon
vesting of the related stock options and stock appreciation rights and the
market values of TCI Group Series A Stock and, ultimately, on the final
determination of market values when such rights are exercised.
Depreciation and amortization expense increased $30 million or 9% and
$60 million or 6% for the three and nine months ended September 30, 1998,
respectively, as compared to the corresponding prior year periods. Such
increases represent the net effect of (i) increases attributable to
acquisitions, capital expenditures and differences in the composition of the
Company's depreciable property and equipment and (ii) decreases attributable to
the 1998 Contribution Transactions and other dispositions.
Other Income and Expenses
TCIC's interest expense decreased $21 million or 8% and $75 million or
9% for the three and nine months ended September 30, 1998, respectively, as
compared to the corresponding prior year periods. Such decreases are primarily
the result of debt reductions attributable to the 1998 Contribution
Transactions.
TCIC's share of CSC's losses, including amortization of the difference
between the recorded value of TCIC's investment in CSC and TCIC's proportionate
share of CSC's net deficiency, aggregated $43 million and $89 million for the
three months ended September 30, 1998 and for the period from March 4, 1998
through September 30, 1998, respectively. As described in note 4 to the
accompanying consolidated financial statements of TCIC, TCIC acquired an equity
interest in CSC on March 4, 1998.
I-31
<PAGE> 33
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
TCIC's investments in affiliates other than CSC are comprised of
limited partnerships and other entities that are primarily engaged in the
domestic cable television business. TCIC's share of net losses of other
affiliates aggregated $32 million and $3 million for the three and nine months
ended September 30, 1998, respectively, as compared to $25 million and $47
million for the corresponding prior year periods. A significant portion of the
change from the nine months ended September 30, 1997 to the nine months ended
September 30, 1998 is attributable to the Company's share of a 1998 gain
recognized by InterMedia Partners on the sale of certain cable television
systems. Such gain was recognized by InterMedia Partners prior to the time that
the Company began to consolidate InterMedia Partners. See note 5 to the
accompanying consolidated financial statements.
During the nine months ended September 30, 1998 and 1997, TCIC
purchased certain notes payable which had aggregate principle balances of $352
million and $190 million, respectively. In connection with such purchases, TCIC
recognized losses on early extinguishment of debt of $44 million and $11 million
for the nine months ended September 30, 1998 and 1997, respectively. Such losses
relate to prepayment penalties and the retirement of deferred loan costs.
Minority interests in earnings of consolidated subsidiaries aggregated
$45 million and $134 million for the three and nine months ended September 30,
1998, respectively, as compared to $46 million and $127 million for the
corresponding prior year periods. The majority of such amounts represent the
accrual of dividends on the Trust Preferred Securities issued in 1997 and 1996
and the accrual of dividends on certain preferred securities issued in August
1996 by a subsidiary of the Company. See note 8 to the accompanying consolidated
financial statements.
Gain on disposition of assets of $493 million for the nine months ended
September 30, 1998 relates primarily to the March 4, 1998 contribution of cable
television systems by TCIC to CSC and certain of the 1998 Joint Ventures. See
notes 4 and 6 to the accompanying consolidated financial statements.
Net Earnings
As a result of the above described fluctuations in the Company's
results of operations, (i) TCIC's net earnings (before preferred stock dividend
requirements) of $74 million for the three months ended September 30, 1998
changed by $112 million, as compared to TCIC's net loss (before preferred stock
dividend requirements) of $38 million for the three months ended September 30,
1997, and (ii) TCIC's net earnings (before preferred stock dividend
requirements) of $1 million for the nine months ended September 30, 1998 changed
by $13 million, as compared to TCIC's net loss (before preferred stock dividend
requirements) of $12 million for the nine months ended September 30, 1997.
I-32
<PAGE> 34
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
MATERIAL CHANGES IN FINANCIAL CONDITION
On March 4, 1998, subsidiaries of TCI (including certain subsidiaries
of TCIC) contributed to CSC certain of its cable television systems serving
approximately 830,000 customers in exchange for approximately 48.9 million newly
issued CSC Class A common shares (as adjusted for a two-for-one stock split).
CSC also assumed and repaid approximately $574 million of debt owed by TCIC to
external parties and $95 million of debt owed to TCI. As a part of such
transaction, TCIC subsidiaries contributed to CSC cable television systems
serving approximately 410,000 customers in exchange for approximately 28.0
million shares (as adjusted for a two-for-one stock split) and CSC assumed
approximately $78 million of intercompany debt owed to TCIC. TCIC has also
entered into letters of intent with CSC which provide for TCIC to acquire a
cable system in Michigan and an additional 3% of CSC's Class A common shares and
for CSC to (i) acquire cable systems serving approximately 250,000 customers in
Connecticut and (ii) assume $110 million of TCIC's debt. The ability of TCIC to
sell or increase its investment in CSC is subject to certain restrictions and
limitations set forth in a stockholders agreement with CSC. For additional
information concerning the CSC Transaction, see note 4 to the accompanying
consolidated financial statements.
In addition to the CSC Transaction, TCIC also completed, during the
first nine months of 1998, six transactions whereby TCIC contributed cable
television systems serving in the aggregate approximately 1,224,000 customers to
six separate joint ventures in exchange for non-controlling ownership interests
in each of the 1998 Joint Ventures, and the assumption and repayment by the 1998
Joint Ventures of debt owed by TCIC to external parties aggregating $323 million
and intercompany debt owed to TCIC aggregating $1,524 million. TCIC has agreed
to take certain steps to support compliance by certain of the 1998 Joint
Ventures with their payment obligations under certain debt instruments, up to an
aggregate contingent commitment of $980 million. In light of such contingent
commitments, TCIC has deferred any gains on the formation of such 1998 Joint
Ventures. Accordingly, TCIC has recorded deferred gains aggregating $163 million
and recognized net gains aggregating $260 million in connection with the
formation of the 1998 Joint Ventures. The deferred gains will not be recognized
until such time as TCIC's contingent commitments are eliminated. The Company
uses the equity method of accounting to account for its investments in CSC and
the 1998 Joint Ventures. The CSC Transaction and the formation of the 1998 Joint
Ventures are collectively referred to herein as the "1998 Contribution
Transactions."
Including the 1998 Contribution Transactions, TCIC, as of September 30,
1998, has, since January 1, 1997, contributed, or signed agreements or letters
of intent to contribute within the next twelve months, the Contributed Cable
Systems, serving approximately 3.5 million basic customers to joint ventures in
which TCIC will retain non-controlling ownership interests. Following the
completion of the Contribution Transactions, TCIC will no longer consolidate the
Contributed Cable Systems. Accordingly, it is anticipated that the completion of
the Contribution Transactions, as currently contemplated, will result in an
aggregate estimated reduction (based on actual amounts with respect to the 1998
Contribution Transactions and currently contemplated amounts with respect to the
pending Contribution Transactions) to TCIC's debt of $4.2 billion and aggregate
estimated reductions (based on 1997 amounts) to TCIC's annual revenue and annual
operating income before depreciation, amortization and other non-cash items and
stock compensation of $1.5 billion and $735 million, respectively. No assurance
can be given that any of the pending Contribution Transactions will be
consummated.
I-33
<PAGE> 35
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
A subsidiary of TCI that was attributed to TCI Ventures Group leases
certain equipment under a capital lease. During 1997, such equipment was
subleased to TCIC under an operating lease. In January 1998, the Company paid $7
million to TCI Ventures Group in exchange for TCI Ventures Group's assignment of
its ownership interest in such subsidiary to TCIC. Due to the related party
nature of the transaction, the $50 million total of the cash payment and the
historical cost of the net liabilities assumed by TCIC (including capital lease
obligations aggregating $176 million) has been reflected as an increase of
TCIC's common stockholder's deficit.
At September 30, 1998, subsidiaries of the Company had approximately
$2.1 billion of availability in unused lines of credit, excluding amounts
related to lines of credit which provide availability to support commercial
paper. Although such subsidiaries were in compliance with the restrictive
covenants contained in its credit facilities at said date, additional borrowings
under the credit facilities are subject to the subsidiaries' continuing
compliance with such restrictive covenants after giving effect to such
additional borrowings. Such restrictive covenants require, among other things,
the maintenance of certain earnings, specified cash flow and financial ratios
(primarily the ratios of cash flow to total debt and cash flow to debt service,
as defined), and include certain limitations on indebtedness, investments,
guarantees, dispositions, stock repurchases and/or dividend payments. See note 7
to the accompanying consolidated financial statements for additional information
regarding the Company's debt.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of "Operating Cash
Flow" (operating income before depreciation, amortization, other non-cash items,
year 2000 costs and stock compensation) ($1,883 million and $2,031 million
during the nine months ended September 30, 1998 and 1997, respectively) to
interest expense ($728 million and $803 million during the nine months ended
September 30, 1998 and 1997, respectively), is determined by reference to the
consolidated statements of operations. The Company's interest coverage ratio was
259% and 253% during the nine months ended September 30, 1998 and 1997,
respectively. Management of the Company believes that the foregoing interest
coverage ratio is adequate in light of the relative predictability of its cable
television operations and interest expense. However, the Company's current
intent is to continue to reduce its outstanding indebtedness such that its
interest coverage ratio could be increased. There is no assurance that the
Company will be able to achieve such objective. In the event the Company is
unable to achieve such objective, management believes that net cash provided by
operating activities, the ability of the Company and its subsidiaries to obtain
additional financing (including the subsidiaries available lines of credit and
access to public debt markets), issuances and sales of equity of its
subsidiaries and proceeds from disposition of assets will provide adequate
sources of short-term and long-term liquidity in the future. See the Company's
consolidated statements of cash flows included in the accompanying consolidated
financial statements.
Operating Cash Flow is a measure of value and borrowing capacity within
the cable television industry and is not intended to be a substitute for cash
flows provided by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
I-34
<PAGE> 36
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying consolidated statements of cash
flows. Net cash provided by operating activities ($868 million and $1,246
million during the nine months ended September 30, 1998 and 1997, respectively)
generally reflects net cash from the operations of the Company available for the
Company's liquidity needs after taking into consideration the aforementioned
additional substantial costs of doing business not reflected in Operating Cash
Flow.
The amount of capital expended by TCIC for property and equipment was
$994 million, $324 million and $571 million during the nine months ended
September 30, 1998 and 1997, and the year ended December 31, 1997, respectively.
In light of TCIC's plans to upgrade the capacity of its cable distribution
systems, and its plans to increase the number of customers who subscribe to
digital video services, TCIC anticipates that its annual capital expenditures
during the next several years will significantly exceed the amount expended
during 1997. In this regard, TCIC estimates that it will expend approximately
$1.7 billion to $1.9 billion over the next three years to expand the capacity of
its cable distribution systems. TCIC expects that the actual amount of capital
that will be required in connection with its plans to increase the number of
digital video service customers will be significant. However, TCIC cannot
reasonably estimate such actual capital requirement since such actual capital
requirement is dependent upon the extent of any customer increases and the
average installed per-unit cost of digital set-top devices. As described below,
TCI is obligated to purchase a significant number of digital set-top devices
over the next three years.
TCIC's restricted cash is primarily comprised of proceeds received in
connection with certain asset dispositions. Such proceeds, which aggregated $353
million and $34 million at September 30,1998, and December 31, 1997,
respectively, are designated to be reinvested in certain identified assets for
income tax purposes.
TCIC has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $208 million at
September 30, 1998. With respect to TCIC's guarantees of $166 million of such
obligations, TCIC has been indemnified for any loss, claim or liability that
TCIC may incur, by reason of such guarantees. TCIC also has provided certain
credit enhancements with respect to the 1998 Joint Ventures. See note 6 to the
accompanying consolidated financial statements. The Company also has guaranteed
the performance of certain affiliates and other parties with respect to such
parties' contractual and other obligations. Although there can be no assurance,
management of TCIC believes that it will not be required to meet its obligations
under such guarantees, or if it is required to meet any of such obligations,
that they will not be material to TCIC.
TCIC's fixed annual commitments pursuant to the EMG Affiliation
Agreement increase annually from $220 million in 1998 to $315 million in 2003,
and will increase with inflation thereafter through 2022.
The Company is a party to affiliation agreements with programming
suppliers. Pursuant to certain of such agreements, the Company is committed to
carry such suppliers' programming on its cable systems. Additionally, certain of
such agreements provide for penalties and charges in the event the programming
is not carried or not delivered to a contractually specified number of
customers.
TCIC is committed to purchase billing services pursuant to three
successive five year agreements. Pursuant to such arrangement, TCIC is obligated
at September 30, 1998 to make minimum payments aggregating approximately $1.6
billion through December 2012. Such minimum payments are subject to inflation
and other adjustments pursuant to the terms of the underlying agreements.
I-35
<PAGE> 37
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Pursuant to certain agreements between TCI and TCI Music, TCIC is
obligated at September 30, 1998 to make minimum revenue payments through 2017
and minimum license fee payments through 2007 aggregating approximately $412
million to TCI Music. Such minimum payments are subject to inflation and other
adjustments pursuant to the terms of the underlying agreements.
TCIC is a direct obligor or guarantor of the payment of certain amounts
that may be due pursuant to motion picture output, distribution and license
agreements. As of September 30, 1998, the amount of such obligations or
guarantees was approximately $273 million. The future obligations of TCIC with
respect to these agreements is not currently determinable because such amount is
dependent upon the number of qualifying films released theatrically by certain
motion picture studios as well as the domestic theatrical exhibition receipts
upon the release of such qualifying films.
Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
Approved Purchasers that may be designated from time to time by NDTC, entered
into the Digital Terminal Purchase Agreement with GI to purchase advanced
digital set-top devices. The hardware and software incorporated into these
devices will be designed and manufactured to be compatible and interoperable
with the OpenCable(TM) architecture specifications adopted by CableLabs, the
cable television industry's research and development consortium, in November
1997. NDTC has agreed that Approved Purchasers will purchase, in the aggregate,
a minimum of 6.5 million set-top devices during calendar years 1998, 1999 and
2000 at an average price of $318 per basic set-top device. Through September 30,
1998, approximately 1 million set-top devices had been purchased pursuant to
this commitment. GI agreed to provide NDTC and its Approved Purchasers the most
favorable prices, terms and conditions made available by GI to any customer
purchasing advanced digital set-top devices. In connection with NDTC's purchase
commitment, GI agreed to grant warrants to purchase its common stock
proportional to the number of devices ordered by each organization, which as of
the effective date of the Digital Terminal Purchase Agreement, would have
represented at least a 10% equity interest in GI (on a fully diluted basis).
Such warrants vest as annual purchase commitments are met. The value associated
with such equity interest will be attributed to TCI Group upon purchase and
deployment of the digital set-top devices. See note 2 to the accompanying
consolidated financial statements. NDTC has the right to terminate the Digital
Terminal Purchase Agreement if, among other reasons, GI fails to meet a material
milestone designated in the Digital Terminal Purchase Agreement with respect to
the development, testing and delivery of advanced digital set-top devices.
On June 30, 1998, TCIC entered into the Lease with an unaffiliated
third party. Under the Lease, TCIC agreed to sell to and lease back from the
Lessor advanced digital set-top devices with an initial aggregate net cost of up
to $200 million. The initial term of the lease is two years, and it provides for
renewal, at TCIC's option, for up to five additional consecutive one-year terms.
Rent under the lease is payable quarterly. At the end of the originally
scheduled or renewed lease term, TCIC is required to either (i) purchase the
equipment at the Termination Value, or (ii) arrange for the sale of the leased
equipment to a third party and pay the Lessor the difference between the sale
price and a predetermined guaranteed value, which in all cases is less than the
Termination Value. As of September 30, 1998, TCIC has sold and leased back
advanced digital set-top devices under the Lease with an aggregate cost of $109
million. Current annual lease payments with respect to such leased equipment are
$16 million. The Company has treated the Lease as an operating lease in the
accompanying consolidated financial statements.
I-36
<PAGE> 38
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
TCIC's various partnerships and other affiliates accounted for by the
equity method generally fund their acquisitions, required debt repayments and
capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by the Company), through
net cash provided by their own operating activities and in certain circumstances
through required capital contributions from their partners.
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCIC may enter into Interest Rate Swaps pursuant to which it (i)
pays fixed interest rates and receives variable interest rates and (ii) pays
variable interest rates and receives fixed interest rates. During the nine
months ended September 30, 1998 and 1997, TCIC's net payments pursuant to the
Fixed Rate Agreements were less than $1 million for each period; and the
Company's net receipts pursuant to the Variable Rate Agreements were $8 million
and $1 million, respectively. At September 30, 1998, all of TCIC's Fixed Rate
Agreements had expired. At September 30, 1998, TCIC would be entitled to receive
$78 million upon termination of the Variable Rate Agreements.
In addition to the Variable Rate Agreements, TCIC entered into Interest
Rate Swaps pursuant to which it pays a variable rate based on LIBOR (5.8% at
September 30, 1998) and receives a variable rate based on CMT (4.7% at September
30, 1998) on a notional amount of $400 million through September 2000; and pays
a variable rate based on LIBOR (5.7% at September 30, 1998) and receives a
variable rate based on CMT (4.8% at September 30, 1998) on notional amounts of
$95 million through February 2000. During the nine months ended September 30,
1998, TCIC's net payments pursuant to such agreements were less than $1 million.
At September 30, 1998, TCIC would be required to pay an estimated $4 million to
terminate such Interest Rate Swaps.
TCIC is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of nonperformance by the
other parties to the agreements. However, the Company does not anticipate that
it will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, as of September 30, 1998, TCIC
does not anticipate material near-term losses in future earnings, fair values or
cash flows resulting from derivative financial instruments. See note 7 to the
accompanying consolidated financial statements for additional information
regarding Interest Rate Swaps.
At September 30, 1998, after considering the net effect of the
aforementioned Interest Rate Swaps, TCIC has $7,075 million (or 58%) of fixed
rate debt and $5,169 million (or 42%) of variable-rate debt. Accordingly, in an
environment of rising interest rates, TCIC expects that it would experience an
increase in interest expense.
I-37
<PAGE> 39
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There were no new material legal proceedings or material developments
in previously reported legal proceedings during the quarter ended
September 30, 1998 to which the Company or any of its consolidated
subsidiaries is a party or of which any of its property is subject,
except as follows:
New Developments in Previously Reported Litigation
As previously reported, on February 24, 1997, James Dalton, et al.
filed suit in District Court for Arapahoe County, Colorado, Case No.
97-CV421, against Tele-Communications, Inc. and certain current and
former officers of TCI and its subsidiary, TCI Communications, Inc.
(John C. Malone, Brendan R. Clouston, Barry P. Marshall, Camille K.
Jayne, Sadie N. Decker, Bruce W. Ravenel, Gerald W. Gaines, Bernard W.
Schotters, II) and Daniel L. Ritchie and Donne F. Fisher, in their
capacity as co-personal representatives of the Estate of Bob Magness.
Plaintiffs filed this action under the Colorado Securities Act and
Colorado common law on behalf of all persons who purchased TCI
securities from January 10, 1996 through October 24, 1996 ("the class
period"). On September 3, 1997, defendants motion to dismiss was
denied. Defendants answered the Complaint on October 3, 1997. Discovery
is proceeding. Based upon the facts available, management believes
that, although no assurances can be given as to the outcome of this
action, the ultimate disposition should not have a material adverse
effect upon the financial condition of the Company.
Item 6. Exhibit and Reports on Form 8-K.
(a) Exhibit -
(27) TCI Communications, Inc. Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended September 30,
1998:
None
<PAGE> 40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI COMMUNICATIONS, INC.
Date: November 13, 1998 By: /s/ Leo J. Hindery, Jr.
------------------------
Leo J. Hindery, Jr.
President and Chief
Executive Officer
Date: November 13, 1998 By: /s/ Stephen M. Brett
---------------------
Stephen M. Brett
Executive Vice President,
General Counsel and
Secretary
Date: November 13, 1998 By: /s/ Bernard W. Schotters
-------------------------
Bernard W. Schotters
Executive Vice President
(Principal Financial Officer)
Date: November 13, 1998 By: /s/ Ann M. Koets
-----------------
Ann M. Koets
Executive Vice President
(Principal Accounting Officer)
<PAGE> 41
EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:
(27) TCI Communications, Inc. Financial Data Schedule
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN TCI COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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